President Obama’s nomination of Federal Reserve Vice Chairman Janet Yellen to become the next Fed chairman faces the threat of significant delays at a delicate time for the U.S. economy as a result of a recent move by Sen. Rand Paul to hold up the nomination to try to force a vote on auditing the central bank.
The Kentucky Republican and libertarian favorite is taking up a long-standing crusade by his father, former Republican presidential candidate and congressman Ron Paul, and demanding a vote on a bill to subject the Fed’s deliberations on interest rates to regular reviews by congressional watchdogs. Arguing that the Fed is wrecking the economy by “printing money” and cheapening the dollar in a way that eventually will spark high inflation, they want to make it possible for Congress to exert more political pressure on the monetary authorities, and perhaps eventually even eliminate the central bank.
“The Fed continues to inflate our currency, wreck our economy and operate in the shadows,” Mr. Paul said in a video drumming up support for the effort from fans around the country. “This will be the fight of our lives.”
With Ms. Yellen set to face a Senate Banking Committee confirmation hearing Thursday, Mr. Paul says he has support for his bill from 44 senators, including 25 Republican co-sponsors — seemingly putting him with reach of the 40 votes needed to block a vote on the nomination unless the Senate agrees to vote on his audit bill. He has informed Senate Majority Harry Reid that he will officially put a hold on the nomination as soon as it is voted out of the Senate banking panel.
While the move is sure to please many libertarian voters in GOP presidential primaries, Mr. Paul’s views are controversial and opposed by many establishment Republicans as well as most Democrats and U.S. business leaders. Moreover, any sign that the expected confirmation of Ms. Yellen faces significant delays likely would send ripples of concern through global financial markets.
“Holding up Yellen will be a problem if it drags on into January,” currency strategist Andrew Busch said. He noted that with Fed Chairman Ben S. Bernanke scheduled to depart at the end of January, and other planned departures from the Fed’s governing board in the next few months, the Fed could be left undermanned with only three governors on board at a time when it is making critical decisions about the economy early next year.
Some also worry that the looming fight over the Yellen confirmation will distract the central bank from its critical mission to support the still-recovering economy and eventually transition away from today’s ultra-easy monetary policies.
Threat to recovery?
Mr. Paul’s move “threatens the recovery in the economy,” said David Kotok, co-founder of Cumberland Advisors. He said the widespread expectation in global markets of continuity at the Fed, which has followed highly stimulative policies, is a key reason U.S. stock markets have hit record highs in recent days despite some gloomy news about the economy.
“It introduces another uncertainty about Fed policy,” he said. “It alters the view of a smooth transition in the leadership of the central bank.”
Mr. Paul subsequently has emphasized that his aim is not trying to kill Ms. Yellen’s nomination, but is to focus the country’s attention on the need for greater accountability at the Fed. “In all likelihood,” he told MSNBC earlier this month, Ms. Yellen will be confirmed.
“Janet Yellen’s been in favor of transparency at the Fed. That’s all we’re asking for, is an open audit a year after the fact,” he said. Mr. Paul also conceded that he may not have the 60 votes that likely would be needed to pass the bill over objections in the Senate, even if he has enough votes to temporarily block the nomination.
Mr. Paul describes the bill as a simple accountability measure, but the legislation would go further than previous bills by subjecting the Fed’s monetary policy decisions and deliberations — not just its banking and regulatory activities — to scrutiny by congressional watchdogs.
Mr. Bernanke called one version of the bill in the House earlier this year a “nightmare scenario” because it would leave Fed governors and reserve bank presidents fearful that their decisions on interest rates would be constantly second-guessed by Congress.
Still, the bill has attracted support from a few Democrats in addition to Republicans. Suspicion of the central bank has risen because of the Fed’s role in the bailout of insurance giant American International Group and propping up big Wall Street and global banks during the global financial crisis of 2008 — despite the face that most of the bailouts turned a profit for the Fed in the end.
Moreover, despite the rhetoric, Congress ended up adding to the Fed’s responsibilities, rather than paring them back, after the crisis. The Fed is now responsible, for example, for supervising massive nonbank financial institutions such as AIG to ensure they do not cause crises again in the future.
Eliminating the Fed?
What concerns Fed-watchers most is the ambitious goals of Mr. Paul’s Campaign for Liberty political action committee, which has pledged to spend $1.5 million to push for enactment of the audit bill this year.
While Mr. Paul rarely talks about eliminating the Fed himself, John Tate, the head of the liberty organization, made it clear in a fundraising video that he sees the bill as only a first step to the elimination of the central bank.
“I don’t need to tell you about all the damage the out-of-control Fed has done to our country” with easy-money policies that are devaluing the dollar, he said. “This risks our entire economic system.”
Cullen Roche, founder of Orcam Financial Group, called such anti-Fed talk “unadulterated poppycock” and said he has grown frustrated trying to educate the growing legion of legislators, citizens and investors who have taken to criticizing the Fed.
“For the better part of five years now, we’ve heard repeated predictions for hyperinflation, U.S. dollar collapse, economic collapse. [They say] the Federal Reserve system is a scam, the U.S. government is ‘printing money,’ government debt will be the end of the U.S.A.,,” he said.
“It’s been devastatingly wrong. There has been nothing close to hyperinflation. There has been nothing close to a bond market collapse. There has been nothing close to a dollar collapse,” he said. In fact, inflation has been largely under the Fed’s 2 percent target since 2008, and the $1.4 trillion budget deficit has been cut in half in the same period.